Corporate governance an important factor in the overall credit rating process

Credit rating agencies continue to consider the quality of corporate governance an important factor in the overall credit rating process for banks.

“While strong governance may well promote timely repayment, particularly weak corporate governance can adversely impact its financial well-being. Ratings are thus unlikely to be enhanced by the existence of sound governance practices, but the absence off such practices could have a negative effect on ratings,” Fitch Ratings said.

The corporate governance standards are highest among the “new” private sector banks. These boards are reasonably broad-based, with independent directors that have wide-ranging experience and the various board committees such as compliance, audit, risk, compensation, are all reasonably vocal.

There are 28 state-owned banks operating in India, accounting for 79% of the total assets in the commercial banking system. Government ownership in these banks varies between 51% and 100%.

There has been an improvement in the practices of these banks with regards to disclosure - largely driven by these banks listing their equities on the domestic bourses, and the need to comply with disclosure and guidelines stipulated by the Stock Exchanges.

However, the board, which includes the executive Chairman and the “independent” directors, continue to be “nominated” by the Indian government.

Fitch Ratings has however, expressed concern on the corporate governance practices of family-controlled old generation private sector banks, which are often controlled by a few families, or communities, who may have non-bank interests.